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CAQ Snapshot: April 2014

Tuesday, April 1, 2014

I. CAQ Approach to Audit Quality Indicators Recognizes Key Role of Audit Committees

In late April, the Center for Audit Quality (CAQ) released the CAQ Approach to Audit Quality Indicators. The paper, representing a two-year effort with CAQ member firms, sets forth in detail the CAQ’s thoughts on the right approach to communicate a set of potential Audit Quality Indicators (AQIs). These AQIs will be pilot tested by CAQ member firms with select audit committees.

The Approach is based on two key elements. First, communications of AQIs should be directed at audit committees, in recognition of the vital role the audit committee plays in providing oversight of the audit. AQI communications can supplement other communications provided to the audit committee, including the auditor’s required communications under professional standards, as well as information included in the audit firm’s audit quality and transparency reports.

Second, the Approach suggests communication of AQIs should be focused largely on engagement-specific indicators. Communication of indicators at the engagement-level could drive actions that might help maintain or increase audit quality on an engagement, and may also assist the audit committee in evaluating the effectiveness of the audit firm.

“At the highest level, our approach flows from the common sense notion that information collection and communication must be tailored to be useful and to avoid excessive cost and overload,” said CAQ Executive Director Cindy Fornelli at the paper’s publication. “This effort reflects our ongoing commitment to improving audit quality, and we look forward to working with audit committees and other key stakeholders to continue to assess and refine the CAQ Approach to Audit Quality Indicators.”

II. CAQ Expresses Caution on EU Action on Audit Reforms

According to the CAQ, audit reform measures recently adopted by the European Parliament, including severe limits on non-audit services and the imposition of mandatory audit firm rotation, could undermine the role of independent audit committees and reduce choice in the marketplace.

“We are concerned that the implementation of these reforms will generate inconsistencies across jurisdictions, which could affect companies and their auditors in the United States,” said the CAQ’s Fornelli in a statement. “We hope that these new rules can be implemented with the greatest consistency possible across Europe with minimal extraterritorial impacts.”

III. Discussion Continues Around the Call to Action

The CAQ has continued to advance the dialogue around how audit committees can enhance disclosures to communicate more clearly to shareholders about audit committee- related activities.

On April 8, Cindy Fornelli joined a webcast panel to discuss Enhancing the Audit Committee Report: A Call to Action, the November 2013 paper released by the Audit Committee Collaboration. Hosted by the Association of Corporate Counsel (ACC) , the webcast featured representatives from companies, audit committees, and investors. The webcast slides and other material are available on the ACC website.

The conversation around the Call to Action continued at an April 22 forum at the University of Delaware’s Weinberg Center for Corporate Governance. Among others, panelists at this event included Martin F. Baumann, Chief Auditor and Director of Professional Standards at the Public Company Accounting Oversight Board; Michelle Edkins, Managing Director, Global Head, Corporate Governance & Responsible Investment at BlackRock, and Joann S. Lublin, Management News Editor at the Wall Street Journal.

IV. Commentary: Understanding and Collaboration Are Essential in Furthering Cybersecurity

To effectively address cybersecurity threats, private and public sector interests must have a clear sense of their specific roles, says the CAQ’s Fornelli in an April LinkedIn Influencer post. “Having this understanding helps us to work together well and carry out our responsibilities effectively,” she writes.

As discussed in a recent CAQ member alert, public company auditors have an important role regarding cybersecurity, one that flows from auditors’ overriding responsibility to provide “reasonable assurance” that the financial statements can be relied upon for investment decisions and other purposes. When applicable, auditors also assess the effectiveness of a company’s internal controls over financial reporting (ICFR). Thus, Fornelli notes, if information about a material breach is identified, the auditor would need to consider the impact on financial reporting (including disclosures) and the impact on ICFR.

Given the wide range of responsibilities among stakeholders—as well as the differing types of cybercrime—Fornelli argues that key players need to deepen collaborative efforts and to ensure effective communications. One important way to collaborate, she adds, is through the give and take of the policymaking process itself. Regulators need robust public input, she says, both to stay abreast of the fast-paced changes in this area and to strike the right balance in the rules.

V. Strong Turnout for Anti-Fraud Collaboration Webcast

On April 16, more than 2,700 viewers tuned in to a webcast, “Your Role in Sustaining a Culture That Deters Fraud,” from the Anti-Fraud Collaboration. Moderated by the CAQ’s Cindy Fornelli, the panel discussion covered how successful organizations and individuals across the financial reporting supply chain can leverage resources to reinforce an ethical culture, assess the effectiveness of anti-fraud initiatives, and implement changes to deter financial fraud. Panelists included R. Karl Erhardt, Senior Vice President and General Auditor at MetLife; Mary J. Steele Guilfoile, Chairman at MG Advisors, Inc.; Robert J. Kueppers, Senior Partner, Global Regulatory and Professional Matters at Deloitte LLP; and Janice Innis-Thompson, Senior Managing Director and Chief Compliance and Ethics Officer at TIAA-CREF. Click here to watch the archived version of this free webcast (registration required).